Sunday, May 16, 2010

How to Protect Your Wealth from the Greek Calamity

The Greek government is bankrupt. Simply put: It has systematically spent much more than it could afford. Now the inevitable day of reckoning has arrived.

A 110-billion euro bailout package by other European governments and the IMF has been announced. But can this political rescue solve Greece's underlying problems?

It's Not a Liquidity Crisis, It's a Solvency Crisis ...

As was the case with the subprime crisis and the banks caught in a debt trap of their own making, Greece's massive debt is not a liquidity problem; it's a solvency problem! And a bailout package cannot solve a solvency problem.

However, the money will flow only if the Greek government adopts 30 billion euros worth of austerity measures that include slashing public-sector wages, cutting pensions, freezing public- and private-sector pay and liberalizing Greece's labor laws.

Of course Greek officials have promised their EU colleagues they'll make the radical reforms ...

But the people of Greece are vehemently against these cuts, which isn't a surprise. They've been told for years — no decades — that government debt doesn't matter, that Keynesian deficit spending is a solution to any crisis. It's even a sure road to prosperity! And now, all of a sudden, they're supposed to start spending less?

Frankly, I don't see it happening. And I don't think anyone else does either.

So Let's Play Kick the Can ...

Do EU politicians and the IMF bureaucrats believe they can rescue Greece? Hardly. They're just buying time for the euro, their 11-year old common currency, and the broader European Union.

After the 16 euro-region finance ministers met in Brussels on Sunday, European Central Bank President Jean-Claude Trichet said Greece's plan will "help to restore confidence and safeguard financial stability in the euro area."

But they know very well that Greece is not alone. It's just a bit ahead of the pack.

Portugal, Spain, and Italy are ultimately facing the same possibility of bankruptcy. That's also true for Japan, the UK and the U.S top stocks for 2010.

Policymakers around the world know it, too. So the only thing they dare do is kick the can down the road! Somebody else, somewhere in the future — hopefully in the distant future — will take care of the bigger, solvency problem.

For the shorter-term,

They Already Told You How They'll Deal with It ...

The politically easiest way is with inflation.

Just think about what Ben Bernanke said during a speech before the National Economists Club in Washington, D.C., on November 21, 2002:

"But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost."

Since then Bernanke has delivered on many of the inflationary promises he made in that speech. Therefore I take his words seriously. And you should, too.

What would President Obama — or a future president — do if a situation like Greece's rears its ugly head in the U.S.?

Implement a strict austerity policy? Cut spending dramatically and raise taxes accordingly? Commit political suicide?

No way, as far as I'm concerned about top stocks for 2010.

Greece is just a harbinger of what's to come. And when the time does come, governments all over the world will shift their printing presses into high gear to alleviate the pressure coming from decades of living beyond their means. That's why in the longer term I expect the bond markets to crumble.

Historically, though, one asset has been used to protect investors' wealth against unsound monetary and fiscal policies: Gold. And if you look at the chart below, you'll see why I say gold's secular bull market has a long way to go.

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